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Somalia Economic Update: Mobilizing Domestic Revenue to Rebuild

MOGADISHU, August 1, 2017- Somalia’s economy is projected to grow at a steady, nominalannual rate of 5% to 7% over the medium-term, according to the second Somalia Economic Update to be published by the World Bank Group. "Mobilizing Domestic Revenue to Rebuild" assesses the prospects for domestic revenue mobilization to support crucial public services and expand economic opportunity.

“Sustainable and reliable domestic revenue is critical for Somalia’s delivery of the National Development Plan,” says Hugh Riddell, World Bank Country Representative for Somalia. “The new government is already working to establish legal and technical capacities for revenue generation.”

To support sustainable development spending and reduce Somalia’s reliance on external funding, “the government and the business community need to work together to find ways to increase domestic revenue without undermining a vibrant private sector, which has been an engine for Somalia’s development over the past two and half decades.”

The report shows that Somalia’s gross domestic product (GDP) growth continues to be urban-based, consumption-driven, and fueled by remittances and donor support. Over 70% of GDP is generated in urban areas. Nominal GDP is estimated to have grown by 5% in 2015 and by 6% in 2016, but data constraints make it difficult to comprehensively assess the macroeconomic situation, especially the rural sector and non-marketed output, such as water, fodder, and food grown for household consumption.

Growth in 2017 will decelerate to 2.5% in real terms, although it is expected to pick up in subsequent years, and grow steadily over the medium-term. “This growth is driven by aggregate demand, fueled by the private sector, remittances, lower oil prices, and improved security,” explains John Randa, Senior Economist at the Bank’s Macroeconomic and Fiscal Global Practice, and Lead Author of the report. “Reconstruction efforts are likely to continue to underpin growth as the new government consolidates peace and security.”

A special focus of the report identifies priorities for improving revenue mobilization and provides a timetable for action and reform. It includes a historical analysis of Somalia’s tax system and legal framework, as well as examples of revenue performance from other countries and potential policies and measures that could be implemented by Somali authorities. The Bank simulation shows that a gradual implementation of tax administration and customs reforms could raise domestic revenue from around 2% of GDP in 2015 to more than 13% of GDP (US$1.1 billion) in 2022.

Raising revenue is crucial to reducing aid dependency, finance service delivery, strengthen a sense of contract between a state and its citizens, and fortify intra-society relationships. The Bank identifies a series of revenue mobilization actions that can be taken by the Government of Somalia in the short- and medium-terms. This includes streamlining the tax laws and increasing tax compliance by large companies.

The World Bank’s Somalia Economic Update series sets out to provide regular, comprehensive analysis of the Somali economy. Editions include recent economic developments and policy recommendations. This edition of the report coincides with Somalia’s worst drought in decades, with over half its population—an estimated 6.7 million people—in need of humanitarian assistance. The drought reflects Somalia’s continued vulnerability to climate-related shocks, which is resulting in considerable urbanization. Resilience to future shocks requires longer-term investments in rural and urban livelihoods, services, and infrastructure.

The report was prepared in close partnership with Somali stakeholders, and aims to contribute to government policy-making and a national conversation on the economy.